Get Out of Debt Guy

I Think My Parents Are Being Greedy

Posted May 10, 2013

WRAL Reader Question

We rent one of my parent's houses (2 years renting it in June 2013). My parent's want to sell the house we are renting, to us. The house was purchased for $10k from the bank (foreclosure) and my parent's remodeled it spending $40k. The tax value of the house is $55,600 and the land is worth $17,600.

My parents sent us a breakdown of what they are seeking for the house and it goes like this:

They are doing owner financing shown below:

$79,000 - Total they want for the house
$10,000 - Down payment they are wanting (which we have in the bank).

6% interest; payments of $1,000 per month for 8 years. (We pay $750 per month in rent now).

I do not think this is a good deal. My husband says the most we should give them is $40k or $50k.

There has been no appraisal done on the home. My husband can get a VA home loan for $40k at a cheaper interest rate as well.

Are my parents being reasonable?

Should we do this deal? (I really don't want to do any other business with either family).

Should we be getting some credit for paying rent for the past 2 years? If so, what would be a reasonable amount?

Should we just keep paying rent and not buy the house?

Melinda

Answer

Dear Melinda,

I love questions like this because they help everyone to see things in a new way and work together to resolve the problem, one way or another.

Ultimately your parents either want the amount they are requesting or they would be willing to agree to sell it to you at a price that is what it is worth as determined by an independent appraiser.

If your gut says the home is not right for you, don't buy it. If there are other homes available that meet your goals for $39,000 less and you are happy with those, buy one of those.

Keep in mind that the tax value for the house and land is often much different, and lower, than the real value of the house and land. They really have nothing in common. Tax value is not a fair market value.

It's quite possible the house in its current condition is far more valuable than the $79,000 asking price. Bottom line is we have no clue what the home would appraise for.

Your parents sound like reasonable people so I'm confident they would see an independent appraisal to establish value is a reasonable approach. In fact I'd even suggest you split the cost of the appraisal with them since you will both benefit from it.

As far as getting credit for paying rent for the last two years that really depends on how much more than fair market value you were paying per month.

Typically the way rent-to-own agreements work is you get credit for either the amount you pay each month over fair market rent for the unit or some percentage (10% or so) that you pay each month. I've not seen any agreements where the person received full credit for rent paid unless the purchase price was significantly inflated.And I mean really inflated.

It seems to me you and your husband are not ready to buy or anywhere close to being able to make a decision about this house.

If you are serious about buying then you need to find a local mortgage broker and get pre-qualified for a mortgage to know how much of a mortgage you can actually get. Whatever they say, cut a third off. Just because you can be approved for a big number does not mean you can afford it and continue to live the life you want.

Then go out and start looking at properties you can afford. This, and getting the appraisal, will help you to better understand the value of the home you are in now and what is available in your price range.

Then, and only then can you make a fully informed decision about what is right for you.

Oh yes, and keep one think in mind, if you are young and plan to start a family in the future, get qualified on his income only if your plan is to stay home with the kids. I've seen far too many couples wind up overloaded with a mortgage when the kids come along.

Steve Rhode
WRAL Get Out of Debt Guy

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10 Comments

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  • jcsmom May 15, 2013

    Great advice! As a local mortgage lender, I agree with all of Steve's advice. The parents don't seem to be greedy at all. This home is an investment and they are treating it as such.

  • steverhode May 13, 2013

    @albegadeep You are right. Most people are not aware of the motivations and pressure that occurs when buying a house. Neither the bank nor the agent are motivated to sell you a house for a lower price that makes more financial sense moving forward.

    The bank maximizes profit by generating bigger loans and the agent makes a bigger commission by selling a higher ticket property. And yes, I do know not every agent does that so calm the flames.

  • albegadeep May 13, 2013

    Interest rate seems high (6%; isn't current 4%?), and an oddly short 'mortgage' period (8 years). I'd definitely want an appraisal, and mortgage quotes from potential lenders.

    As for the 'pre-qualified' amount - try halving it. When I was pre-qualified, what they said I could buy was FAR more than I could actually afford. A carefully constructed, realistic budget would be good here.

  • steverhode May 13, 2013

    @cushioncritter Interesting point I had not considered. Thanks for sharing.

  • cushioncritter May 13, 2013

    It doesn't say how old the parents are, but if either one of them might need to go into a nursing home in the next five years (for Alzheimer's, for example), the "sweet deal" she wants would become an invalid "transfer" of assets in the eyes of Medicaid, which provides long term nursing home care in exchange for 100% of your assets and income (eventually). Medicaid might "claw back" the money from the children by making them financially responsible for the care of their parents. So if she actually did want the house, and to be able to keep it, she needs to buy it at or above fair market value. Medicaid doesn't just let the children make up the difference, they would actually have to deed the home back to the parents so that it can be eventually sold by the state (the states are required to recoup their Medicaid costs in this way).

    Licensed accountants and attorneys are under a type of gag order on the topic of Medicaid and that might apply to Steve as well.

  • common tater May 10, 2013

    Very diplomatic presentation of very sound advice. House tax values unfortunately seem to be mostly based on averages for the area, like "comps"...and don't really account for renovations (or lack therof) to any extent. But it would be interesting to know if the renovations were done before or after the most recent tax valuation.

  • steverhode May 10, 2013

    @Terkel You are right, there will certainly be expectations that it be repaired.

  • Terkel May 10, 2013

    Well, they do seem to want to pay half of the tax value. She may not be greedy, just uninformed. I think the advice was sound.

    But the bottom line is, she comes right out and says she doesn't want to do business with either family (usually a good policy). IMHO, they should follow the advice - except forget this house and therefore the appraisal. Buy one from someone else. If the roof needs replacing or the water heater blows up 6 months in, there will be hard feelings.

  • steverhode May 10, 2013

    Well I'm looking at it as a teachable moment and hopefully we can assist here to put it all back in perspective.

    Do you have any advice to share with her that I might have missed?

  • lrakydarb2 May 10, 2013

    I think the little twit that posted this is greedy.

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.